Pathikonda Balasubba Setty (Deceased) v. Commissioner Of Income-Tax, Mysore.

Narayana Pai, J.:— The assessee, deceased Pathikonda Balasubba Setty was carrying on business as karta of a joint family in several articles. Among the lines of business, two were the buying and selling of groundnut kernel and manufacturing and selling of groundnut oil and oilcake. His account year was from Diwali to Diwali. His return of income for the account year ended 1st November, 1948, liable to assessment during the income-tax year 1949-50 was not accepted as fully correct by the Income-tax Officer. He made therefore three additions to the income as returned as follows: To the gross profits attributable to the business of buying and seiling of groundnut, he added a sum of Rs. 16,845 on the ground that the several transactions were not fully supported by vouchers and that, therefore, it was necessary to estimate the gross profits. He estimated the same at 10 per cent, of the overall turnover.

2. To the gross profit attributable to the business in groundnut oil and cake, he added a sum of Rs. 27,563 on the ground that the percentage of yield as returned was low. The officer thought that the correct percentage of yield should be 12 per cent. Besides his estimate of the correct percentage of the profits, to the gross turnover or the gross value of the raw material, he sought assurance to his opinion in certain other features of the assessee's accounts. He found on an examination of the accounts that there were entries purporting to be borrowings from eight different persons adding up to a sum of Rs. 33,776 which were suspicious and could not be regarded as genuine; he also found that entries relating to a deposit and a withdrawal of Rs. 14,000 on 15th January, 1948, were similarly open to suspicion. He did not, however, make those entries the basis for further addition or treat them as representing a separate head of income in respect of which an addition could or should be made to the income returned. His express observations in that regard in his order were:

“It should be mentioned here that the addition on account of enhancement of gross profit is supported by another feature also….

I find that at least the following items are not free from suspicion and therefore they deserve to be added. But since an addition is made on account of enhancement of gross profit, I am now only mentioning them as a supporting factor for the addition on account of enhancement of gross profit.”

3. The officer also found a great discrepancy between the value of closing stock as found in the books of account of the assessee and the value of such stock on the last day of the account year found pledged or remaining pledged to certain banks. The discrepancy was of the order of Rs. 1,18,431. The assessee gave certain explanations which the officer did not find entirely satisfactory. He concluded the discussion of this topic with the observation:

“Allowing a very wide margin for the assessee on the statements, I-think at least Rs. 20,000 would represent stocks, the source of which is not satisfactorily explained.”

4. The assessee appealed to the Appellate Assistant Commissioner of Income-tax, Bangalore, who gave him substantial relief under his order dated 26th September, 1956.

5. In regard to the addition made by the assessing officer to the gross profit in the purchase and sale of groundnut, the Appellate Assistant Commissioner pointed out that 10 per cent, adopted by the original authority was excessive and that on the basis of the percentage of profit, in comparable businesses in the same circle as well as on the basis of previous orders of the Appellate Tribunal relating to the same, the proper percentage to adopt would be 7.4 On this basis he found that the income actually returned by the assessee was the correct estimate and did not require enhancement. He, therefore, struck off the addition of the sum of Rs. 16,845 made by the Income-tax Officer under this head.

6. On a similar re-estimate of yield relating to the manufacture of oil and oilcake, the Appellate Assistant Commissioner reduced the addition made by the Income-tax Officer from Rs. 27,563 to Rs. 8,680.

7. Regarding the addition of Rs. 20,000 made on account of unexplained stock, the Appellate Assistant Commissioner did not interfere with the assessing officer's estimate observing that the representative of the assessee appearing before him also did not seriously contest the position and expressing his own opinion to the effect that the Income-tax Officer had given convincing reasons for making the addition in question.

8. Thereupon, the department, represented by the Income-tax Officer, appealed to the Income-tax Appellate Tribunal. Grounds Nos. 1, 2 and 3 in the memorandum of appeal read as follows:

“1. The Appellate Assistant Commissioner's order, in so far as it relates to the deletion of the addition of Rs. 16,845 in groundnuts and Rs. 27,563 in oil and oilcakes, is erroneous and is opposed to the facts, evidence and circumstances of the case.

2. The Appellate Assistant Commissioner has not appreciated the fact that the enhancement of profits in groundnuts, oil and cake is supported by, inter alia, (1) the large difference of Rs. 1,18,431 between stock as per books and stock pledged with bank as on the last day of the accounting year and (2) presence of (a) credits in various folios totalling to Rs. 33,776, and (b) a deposit of Rs. 14,000 on January 15, 1948, in the Imperial Bank of India, which have not been satisfactorily explained in spite of opportunities given.

3. The Appellate Assistant Commissioner has failed to note that whereas the unaccounted stock amounted to Rs. 1,18,431, the addition under the head “unaccounted stock” was restricted to Rs. 20,000 having regard to other additions; hence there was no justification for deleting the additions to profit in groundnuts, oil and cake.”

9. The other grounds are argumentative. The memorandum closes with the prayer reading:

“For these, as well as for other reasons which may be adduced at the time of hearing, it is prayed that the Appellate Assistant Commissioner's order in so far as it relates to the deletion of the enhancement of profits in groundnuts, oil and cakes, be vacated and the addition made by the Income-tax Officer restored or in the alternative the unexplained cash credits and deposits be added.”.

10. When the appeal was taken up for hearing by the Tribunal, the assessee sought an adjournment on the ground of illness. The Tribunal refused to grant the request on the ground that it was not supported by any medical certificate and proceeded to dispose of the appeal ex parte. In a very brief order, after summarising the actual result in figures in the computation of tax liability, the Tribunal observed as follows i

“The Appellate Assistant Commissioner must have appreciated that even if addition cannot be supported on the basis of the out-turn, the other defects in the shape of cash credits, etc., set out above, can independently form a proper basis. It is, therefore, necessary for him to consider this important aspect of the matter, which he will have to do, after giving a proper opportunity to the assessee to let in such evidence as it may have and then finally decide the appeal.”

11. That appears to be the basis for the ultimate order made by the Tribunal setting aside the entire order of the Appellate Assistant Commissioner and directing him to take the appeal once again on his file and dispose it of on the lines suggested by the Tribunal, namely, making a re-calculation of the entire gross profit on the basis of a detailed examination of the entries and marshalling them, as the Tribunal observes, in a chronological order.

12. Subsequently, the Tribunal, at the instance of the assessee, set aside the ex parte order and made a fresh disposal of the appeal on December 11, 1958. This order is also very brief. Although the Tribunal noticed the argument that the Income-tax Officer himself had not treated the cash credits or the bank deposit as an independent source or basis for addition, the Members of the Bench observed that they were substantially in agreement with the views expressed by the previous Bench in its original order of 7th April, 1958. A further argument was addressed before the Tribunal that a re-making of the account on the lines suggested by the Tribunal may result in the tax liability getting enhanced beyond the figure computed by the original assessing authority, which was disposed of by them with the observation:

“It is in the interests of the assessee himself that the question of cash credits and the bank deposit should be examined on their own merits; if the final result, after the investigation is carried out, turns out to the detriment of the assessee, then it cannot be helped.”

13. Thereupon, the assessee moved the Tribunal under section 66(1) to refer certain questions of law said to arise out of the appellate order. That application having been dismissed, the assessee approached this court with an application under sub-section (2) of section 66 of the Income-tax Act, 1922. This court, by its order dated 20th July, 1962, directed the Tribunal to draw up a statement of the case and refer the followirg question to this court:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal had jurisdiction to set aside the entire order of the Appellate Assistant Commissioner and direct a disposal of the appeal afresh by examining the question of unaccounted stock which was not in contest before it as well as cash credits and bank deposits when the appeal by the department was only in regard to additions under gross profit?”

14. It will be seen that the point for consideration under this question is the nature and extent of the jurisdiction of the Income-tax Appellate Tribunal and the extent of its appellate powers.

15. The present case is governed by the Income-tax Act of 1922. But, on this question, there is no difference between the relevant provisions of the 1922 Act and the corresponding provisions of the 1961 Act.

16. Under both the Acts the assessee has a right of appeal to two courts, first to the Appellate Assistant Commissioner and then to the Income-tax Appellate Tribunal. The first appeal is under section 30 of the Act of 1922; section 31(3) sets out in detailed terms the nature and extent of the appellate powers of the Appellate Assistant Commissioner. The section of the 1961 Act, corresponding to section 31(3) of the old Act and setting out the powers of the Appellate Assistant Commissioner, is section 251. There is no difference between the two sections, although the contents of the old section are re-arranged and put in briefer language in section 251 of the 1961 Act. For our present purpose, the point to note is that both under the old Act and under the new Act, the powers of the Appellate Assistant Commissioner included the power to enhance the tax imposed by the original assessing authority.

17. The appeal to the Appellate Tribunal against the orders of the Appellate Assistant Commissioner was provided by section 33 of the 1922 Act. It corresponds to section 253 of the new Act and also portions of section 254. The powers of the Appellate Tribunal are described as follows in sub-section (4) of section 33 of the Act of 1922:

“The Appellate Tribunal may, after giving both parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit, and shall communicate any such orders to the assessee and to the Commissioner.”

18. The corresponding provision of the 1961 Act, namely, sub-section (1) of section 254, reads as follows;

“The Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit.”

19. The rest of the portion of sub-section (4) of the old section 33 is repeated in sub-section (3) of the new section 254.

20. The effect of these provisions is that the Appellate Tribunal's powers are limited to passing such orders as they may think fit on the appeal. The expression “on the appeal” clearly and indubitably points to the conclusion that the powers of the appellate authority, the Tribunal, are limited to the subject-matter of the appeal.

21. This is necessarily so because every point dealt with by the lower appellate court, the Appellate Assistant Commissioner, need not be the subject of attack before the Appellate Tribunal. The interests of the revenue are sufficiently protected by the extensive powers given to the first appellate authority, the Appellate Assistant Commissioner. At that stage, the only appellant would be the assessee, not the department, although it is entitled to be represented by an officer of the department in support of the order of the original court. A mistake, if any, committed by the original authority, which is adverse to the interests of the assessee, will be canvassed by the assessee before the Appellate Assistant Commissioner. A mistake, if any, committed by the original assessing authority which is detrimental to the interests of the revenue is capable of being corrected by the Appellate Assistant Commissioner even without an appeal having been presented by the department. At the next stage of second appeal to the Appellate Tribunal, the liberty is given to both the sides to go up in appeal to the Appellate Tribunal and when the Appellate Tribunal comes to deal with the matter, the law regards it sufficient to leave it to the parties going up as appellants before the Tribunal to limit their attack on the order of the first appellate authority and to seek the intervention of the Tribunal only to the extent necessary to correct the errors in the order of the Appellate Assistant Commissioner according to the case of the appellant.

22. It should be noted that in comparison to the sections describing the power of the Appellate Assistant Commissioner, the sections which describe the appellate powers of the Tribunal do not make any reference to a power to enhance the assessment or to enhance the tax in the same way as the Appellate Assistant Commissioner is empowered to do while dealing with an appeal against the order of the assessing authority.

23. As the appellate power is a power which is conferred by statute, both its existence as well as its extent has to be gathered from the relevant statutory provision. The fundamental idea is that an appellant seeks a relief from an appellate court, and not detriment to himself. Even under the general provisions of the law of procedure, the worst detriment which an appellate court may visit on an appellant is to dismiss the appeal with a direction in an appropriate case to pay costs to the opposite side. An order adverse to the interests of the appellant—adverse in the sense that it takes away from him a benefit which he has already acquired under the order appealed from —is possible only by means of an order made either upon a cross-appeal filed by the other side or on the basis of a memorandum of cross-objections presented by him wherever the law permits him to do so.

24. Unless the special law which creates the right of appeal prescribes a different procedure, the ordinary powers of an appellate court described in the Code of Civil Procedure apply to the appellate authority—vide section 108 of the Code of Civil Procedure. One of the powers described therein is the power to make a remand—vide section 107(1)(b) of the Code of Civil Procedure. But that power of remand is ancillary to the main power given to the appellate authority and has to be exercised in aid of the main power and not in excess of it. Although section 107 of the Code of Civil Procedure itself does not set out the grounds on which or the circumstances in which or the purpose for which an appellate court may make an order of remand, the general principles are well settled and are stated in general terms in rule 23 of Order XLI, Civil Procedure Code. Uniform judicial interpretation placed on these powers is that the power of remand should be used sparingly and ordinarily only in cases where the appellate authority, after an examination of the material already placed on record by way of evidence, takes the view that it is not possible for it to make a just order on the appeal without the assistance of further evidence or without the assistance of a clearer finding by the authority from whose order the appeal has been presented. That implied limitation on the power of remand is directly related to the principle of justice that parties interested in obtaining an order from a court or Tribunal are under a duty to place before the original authority all the evidence on which they rely for obtaining the relief they seek.

25. That the general principles should be as summarised above is also the view expressed by the Madras High Court in two cases, M.R.M Periannan Chettiar v. Commissioner of Income-tax [1960] 39 I.T.R 159. and V. Ramaswamy Iyengar v. Commissioner of Income-tax [1960] 40 I.T.R 377..

26. Because we have discussed the matter on principle at some length, it is not necessary to make any detailed reference to the observations contained in these judgments because they express the same principles in different language. But it is necessary to point out that in the case of V. Ramaswamy Iyengar v. Commissioner of Income-tax the proposition is clearly stated that the power of remand which the Income-tax Appellate Tribunal exercises pursuant to rule 28 framed by itself cannot be exercised in such a way as to result in an enhancement of the tax computed by the original assessing authority. The reason behind this is the well established principle that an authority which does not have a certain power cannot exercise such power indirectly through the instrumentality of another authority exercising a wider power.

27. Applying these principles to the order of remand made by the Appellate Tribunal in respect of which the question of law is referred to us for opinion, the following position clearly emerges:

The right or wrong of the addition of Rs. 20,000 on account of unexplained stock was not the subject-matter of the appeal at all; so far as the assessee is concerned, that addition was confirmed by the first appellate authority, the Assistant Commissioner, and the said opinion of the Appellate Assistant Commissioner was not called in question by the assessee; it was a decision in favour of the department and was not capable of being appealed from by them. It is necessary to say this in relation to the department's appeal because both the 2nd and the 3rd grounds in the grounds of appeal appear to relate to the said sum of Rs. 20,000. The statement contained in ground No. 3 to the effect that Rs. 20,000 alone were added having regard to the other additions is demonstrably inaccurate. The detailed reference we have made to the relevant portions of the Income-tax Officer's order places it beyond doubt that limiting the addition to Rs. 20,000 was after giving the widest margin to the statement made by the assessee and was not to any extent related to the opinion of the officer in respect of other heads of addition.

28. The only other heads under which additions were made by the Income-tax Officer were the two lines of business, viz., buying and selling of groundnut and manufacture and sale of groundnut oil and cake. It is in respect of the estimate of gross profit arising out of these two lines of business that the assessing authority found it necessary to make a re-estimate and added certain figures to the income returned by the assessee. The allegedly suspicious cash credits (that is to say, the borrowing from eight creditors as noted in the books of account which the officer found it difficult to accept as genuine) and the suspicious deposit and withdrawal of Rs. 14,000 were not treated by the officer as separate heads for making additions to the income returned. From the two sentences we have quoted from the officer's order, it is perfectly clear that the officer had no intention or no idea whatever of making further additions under these heads but regarded them only as circumstances lending assurance to the accuracy of additions made by him on account of groundnut oil and cake.

29. In view of these clear and, indisputable circumstances, we have no doubt in our mind that the Tribunal has proceeded on demonstrably inaccurate basis of thinking that it was open to the Appellate Assistant Commissioner to treat the cash credits, etc., as an independent basis for additions. What is more, in their final order of 11th December, 1958, the Tribunal appears to think that, even if the re-hearing of the appeal in the light of the directions contained in their remand order should result in detriment to the assessee, it is not a matter which they could help. If by the detriment what the Tribunal meant was an enhancement beyond the figure fixed by the Income-tax Officer, there can be no doubt whatever that the Tribunal was exercising a power which it did not possess.

30. It follows, therefore, that the direction given by the Tribunal that cash credits and the deposit and withdrawal may be regarded as an independent source of or basis for addition is a direction made beyond the scope of its powers and that they have similarly permitted the order of remand to operate beyond the scope of their appellate powers by contemplating, if not actually directing an enhancement of liability beyond the figures fixed by the Income-tax Officer and that the reference to the question of unaccounted stock was totally beyond the scope of the appeal itself.

31. Our answer to the question referred, therefore, is the following. On the facts and in the circumstances of this case, the Appellate Tribunal had no jurisdiction to set aside the entire order of the Appellate Assistant Commissioner; it could deal only with that part of the order of the Appellate Assistant Commissioner which dealt with the two additions of Rs. 16,845 and Rs. 27,563 but could not deal with or set aside that part of the order of the Appellate Assistant Commissioner which confirmed the addition of Rs. 20,000 made by the Income-tax Officer on account of unexplained stock. The direction by the Appellate Tribunal to the Appellate Assistant Commissioner to examine the question of unaccounted stock afresh is beyond the appellate powers of the Tribunal. The direction for the examination of cash credits and bank deposits is beyond its jurisdiction, if it is to be regarded as a direction to treat them as a separate head for making additions, but may be regarded as within jurisdiction if it is construed as a direction to examine the same as evidence to lead assurance to the additions in.respect of groundnut and groundnut oil and cake. The observation amounting in the circumstances to a direction that on a re-hearing of the appeal, the Appellate Assistant Commissioner may make an order resulting in an enhancement of tax liability beyond the liability fixed by the Income-tax Officer, the original assessing authority, is beyond the appellate powers of the Tribunal.

32. The assessee will have the costs of this reference. Advocate's fee Rs. 250.

33. Question answered in the negative.